Short Condor

The short condor is a neutral strategy similar to the
short butterfly. It is a limited risk, limited profit trading strategy that is structured to earn a profit when the
underlying stock is perceived to be making a sharp move in either direction.

Using calls, the options trader can setup a short condor by combining a bear call spread and a bull call spread. The trader enters a short call condor by buying a lower strike in-the-money call, selling an even lower striking in-the-money call, buying
a higher strike out-of-the-money call
and selling another even higher striking out-of-the-money call. A total of 4
legs are involved in this trading strategy and a net credit is received on entering
the trade.

Limited Profit Potential

The maximum possible profit for a short condor is equal to the initial credit received
upon
entering the trade. It happens when the underlying stock price on expiration date
is at or below the lowest strike price and also occurs when the stock price is at
or above the highest strike price of all the options involved.

Limited Risk

Maximum loss is suffered when the underlying
stock price falls between the 2 middle strikes at expiration. It can be derived that the maximum loss is equal to the difference in strike prices
of the 2 lower striking calls less the initial credit taken to enter the trade.

Example

Suppose XYZ stock is trading at $45 in June. An options trader executes a short
condor by selling a JUL 35 call for $1100, buying a JUL 40 call for $700, buying
another
JUL 50 call for $200 and selling another JUL 55 call for $100. A net credit
of $300 is received on entering the trade.

To further see why $300 is the maximum possible profit, lets examine what happens
when the stock price falls to $35
or rise to $55 on expiration.

At $35, all the options expire worthless, so the initial credit taken of $300 is
his maximum profit.

At $55, the short JUL 55 call expires worthless while the profit from the long JUL 40 call (worth $1500) and the long JUL 50 call (worth $500) is used to offset the short JUL 35 call worth
$2000 . Thus, the short condor trader still earns the maximum
profit that is equal to the $300 initial credit taken when entering the trade.

On the flip side, if XYZ stock is still trading at $45 on expiration in July, only the
JUL 35 call and the JUL 40 call expire in the money. With his long JUL 40 call
worth $500 and the initial credit of $300 received to offset the short JUL 35 call valued at $1000, there is still a net loss of $200. This is the maximum possible
loss and is suffered when the underlying stock price at expiration is anywhere between $40 and
$50.

Note: While we have covered the use of this strategy with reference to stock options, the short condor is equally applicable using ETF options, index options as well as options on futures.

Commissions

Commission charges can make a significant impact to overall profit or loss when implementing option spreads strategies. Their effect is even more pronounced for the short condor as there are 4 legs involved in this trade compared to simpler strategies like the vertical spreads which have only 2 legs.

If you make multi-legged options trades frequently, you should check out the brokerage firm OptionsHouse.com where they charge a low fee of only $0.15 per contract (+$4.95 per trade).

Similar Strategies

The following strategies are similar to the short condor in that they are also high volatility strategies that have limited profit potential and limited risk.

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